Karishma DodejaPartner

Deepali VermaAssociate

• What is a resolution plan, within the larger framework of the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC), and how does it aim to maximise the value of the corporate debtor’s assets?

  A resolution plan is structured to turnaround the operations of a corporate debtor or to resolve its assets. Strictly speaking, a resolution plan is not a contract, rather, it is in the nature of an offer that a prospective resolution applicant extends to the committee of creditors (CoC). Prospective resolution applicants have complete flexibility to devise their offers and to negotiate with the CoC.

  A prospective resolution applicant may contemplate various measures to maximise the value of assets of the corporate debtor in its resolution plan, including:

  • sale of all or part of the assets of the corporate debtor, whether subject to any security interest or not,
  • transfer of all or part of the assets of the corporate debtor to one or more persons,
  • restructuring of the corporate debtor by way of merger, amalgamation and demerger, and
  • satisfaction or modification of any security interest.

  While the CoC is not bound to vote in favour of a resolution plan with the highest value or which is most compliant with the evaluation matrix, a resolution plan with the highest value and/or which is the most compliant is likely find favour with the CoC.

  Most resolution plans seek to provide capital structure-related solutions, given that the equity value of such corporate debtors undergoing the CIRP is significantly eroded and the debt levels are largely unsustainable. Some resolution plans offer a monetisation strategy whereby value from the sale of the underlying assets is utilised to discharge the restructured debts of the corporate debtors. Given that the primary objective of the IBC is to continue the corporate debtor as a going concern, a capital structure related solution is certainly preferable to selling the underlying assets.

• What are some of the issues faced during the implementation of a resolution plan? What is the impact of these issues on the timelines of CIRP?

  Given the nature of CIRP, approval of a resolution plan and implementation thereof often runs the risk of delays on account of judicial proceedings – often multiple and on various nuances.

  For instance, during the CIRP of Jet Airways, implementation of the resolution plan submitted by the Jalan Kalrock consortium was marred by various litigations including an inter-se dispute amongst the creditors and the consortium in connection with satisfaction of conditions precedent, and disputes in connection with payment of workmen dues.

  Another example is the CIRP of Reliance Infratel Limited wherein the resolution plan submitted by Reliance Projects and Property Management Services, which was approved by the CoC with a voting share of 100% in March 2020 and by the National Company Law Tribunal (NCLT) in December 2020, was pending implementation till November 2022 due to inter-creditor disputes in connection with the distribution of amounts under the resolution plan. In fact, the distribution of amounts to the stakeholders under the resolution plan of Reliance Infratel Limited is still pending.

  Since the implementation of the IBC in 2016 and till December 2022, 611 CIRPs have yielded resolution plans and creditors have realised INR 2.53 lakh crore under these resolution plans. Even though CIRP is a statutorily time-bound process and is required to be completed within 330 days from the insolvency commencement date, which includes a buffer for litigation delays, the average time taken for closure of CIRPs yielding resolution plans is 587 days.¹

• Who is eligible to submit a resolution plan? Are there any specific considerations for strategic/financial investors?

  Section 29A of the IBC sets out the list of facts or circumstances under which a prospective resolution applicant is ineligible to submit a resolution plan. The ineligibility criteria include the following persons:

  • an undischarged insolvent;
  • a willful defaulter; or
  • a person controlling or managing an account of a corporate debtor which is declared a non-performing asset for a year since the commencement of the CIRP.

  Some key aspects to note are:

  • a resolution professional of a corporate debtor and the CoC comprising the financial creditors of the corporate debtor undertake the testing for eligibility of a prospective resolution applicant, under Section 29A of the IBC, at the time of the submission of the resolution plan by a prospective resolution applicant;
  • this testing also extends to:
    • any person acting jointly or in concert with a prospective resolution applicant; and
    • connected persons of a prospective resolution applicant;
  • any breach of these criteria will disqualify a prospective resolution applicant from submitting a resolution plan.

  Specific considerations for strategic/financial investors

  Strategically, if a prospective resolution applicant is organised as a ‘financial entity’, certain exemptions under Section 29A are available to it. For instance, such prospective resolution applicant is not required to satisfy the requirement mentioned in (c) above (given it is a ‘financial entity’) as long as such prospective resolution applicant is not a related party to the corporate debtor.

  Additionally, prospective resolution applicants must satisfy certain financial requirements specified in the invitation for expression of interest to submit a resolution plan (IEOI) issued by a resolution professional, depending on whether they are financial or strategic investors. Typically, these include net worth (for prospective resolution applicants organised as companies) or assets under management (for prospective resolution applicants organised as financial entities). Generally, resolution professionals are amenable to engaging on these requirements with prospective resolution applicants, as long as prospective resolution applicants are able to demonstrate that they have sufficient source of funds or committed funds.

• What is the evaluation matrix and why is it important?

  An evaluation matrix is a list of parameters and the manner of application of such parameters, as approved by the CoC, for consideration of a resolution plan. Such parameters include various quantitative and qualitative components such as upfront cash recovery, percentage of debt resolution, rate of discounting for payment to financial creditors, percentage holding in the equity of the corporate debtor, revenues of a resolution applicant and ability of a resolution applicant to manage the corporate debtor. An evaluation matrix is an effective tool used by the CoC for comparison between resolution plans. It also functions as a guide to prospective resolution applicants on how their bids will be evaluated by the CoC.

  Strategically, in order for a resolution plan to be successful, it should endeavour to satisfy the criteria set out under the evaluation matrix specified in the request for resolution plan (RFRP). The CoC is not bound to vote in favour of a resolution plans with the highest value or a resolution plan which is most compliant with the requirements of the evaluation matrix. However, a resolution plan with the highest value and/or which is the most compliant will likely find favour with the CoC.

• What are the mandatory contents of a resolution plan?

  A resolution plan should address the mandatory contents as set out under the IBC and the CIRP Regulations and also the eligibility criteria as specified under Section 29A of the IBC and the IEOI. Apart from this, a prospective resolution applicant has considerable flexibility in formulating a resolution plan.

  Highlighting some aspects that a resolution plan must include:

  • payment of CIRP costs in priority to the payment of other debts of the corporate debtor;
  • payment to operational creditors in the manner contemplated under the IBC in priority to the financial creditors;
  • payment to financial creditors who have a right to vote but did not vote in favour of the resolution plan in the manner contemplated under the IBC in priority to the financial creditors who voted in favour of the resolution plan;
  • the term of the resolution plan and its implementation schedule; and
  • the management and control of the business of the corporate debtor during such term.

  Additionally, other mandatory requirements, such as a resolution applicant demonstrating adequate means for supervising the implementation of its resolution plan and its ability to implement its resolution plan, can be satisfied through certifications/confirmations in the resolution plan.

  It is critical for a prospective resolution applicant to provide for and demonstrate that these mandatory contents are duly satisfied in its resolution plan, given that any dissatisfaction will lead to such plan being non-compliant and not being considered by the CoC.

• How are amounts to be distributed to various creditors determined under a resolution plan? What happens to the dues of those financial creditors who do not vote in favour of the resolution plan?

  The key aspect of any resolution plan is the financial proposal to settle the debts/claims of various stakeholders. To the extent a resolution plan provides for mandatory contents, inter-se distributions amongst various stakeholders may be determined by the CoC in the exercise of its commercial wisdom. Unless specifically prohibited under the RFRP, a resolution plan can provide for the settlement of debts/claims by way of upfront or deferred payments.

  According to prevailing judicial precedent, financial creditors who do not vote in favour of the resolution plan are required to be paid on an upfront basis. In such cases, resolution applicants should consider engaging appropriately with the CoC (specifically with those financial creditors who are not in favour of the resolution plan) to commercially solve this issue.

  Often stakeholders raise disputes in relation to inequitable distribution of proceeds under a resolution plan. Given this, the Ministry of Corporate Affairs (MCA), in its Discussion Paper dated 18 January 2023² (Discussion Paper), has contemplated separating the approval for implementation of a resolution plan from the approval for distribution of proceeds contemplated under a resolution plan. This proposal has been welcomed given that implementation of a resolution plan is often stayed/delayed due to disputes amongst stakeholders in connection with the distribution of proceeds under the resolution plans. However, commercially, financial creditors may not be amenable to voting in favour of a resolution plan until the distribution of amounts under the resolution plan is crystallised.

• Is a prospective resolution applicant required to submit details regarding management and control of the corporate debtor in its resolution plan?

  Given that change in control or management of the corporate debtor will affect the overall resolution, a resolution plan must provide for:

  • proposed board of directors of the corporate debtor; and
  • proposed key managerial personnel of the corporate debtor (including CEO, COO and CFO).

  This also helps in determining whether a specific resolution plan meets the relevant qualitative criteria under the evaluation matrix (if any).

• How are avoidance transactions dealt with under a resolution plan?

  Under the IBC, there are four types of transactions that can be avoided:

  • preferential;
  • undervalued;
  • fraudulent; and
  • extortionate.

  The resolution professional is required to file separate avoidance applications to set aside each of these transactions.

  A resolution plan is mandatorily required to provide for the manner in which proceedings in respect of avoidance transactions will be pursued after the approval of the resolution plan and the manner in which the proceeds, if any, from such proceedings will be distributed.

  According to prevailing judicial precedent, the resolution professional is required to pursue such applications post the approval of a resolution plan by the NCLT. The costs incurred by such resolution professional will be determined by the NCLT. Any amounts received from such proceedings will be available for distribution to creditors.³

Prospective resolution applicants may submit individual and separate resolution plans for one or more assets of the corporate debtor, if such resolution plans are invited by the resolution professional subject to the approval of the CoC.

• Can individual and separate resolution plans be submitted for multiple assets of a corporate debtor?

  Prior to the amendment of 16 September 2022, all prospective resolution applicants were required to submit a single resolution plan for the corporate debtor as a whole (i.e., inclusive of all the assets of the corporate debtor). Currently, prospective resolution applicants may submit individual and separate resolution plans for one or more assets of the corporate debtor, if such resolution plans are invited by the resolution professional subject to the approval of the CoC.

  In its Discussion Paper, the MCA has proposed that at least one such resolution plan should provide for insolvency resolution of the corporate debtor as a going concern, which may include provisions for its corporate restructuring and other mandatory requirements such as management of affairs of the corporate debtor after approval by the NCLT.

  For instance, NCLT Chennai recently approved a resolution plan for the resolution of certain assets of the corporate debtor, Hindustan Photo Films Mfg. Co. Ltd., by way of a scheme of demerger. Through a separate order, the remaining assets (treated as excluded assets by the CoC) were ordered to be liquidated along with the corporate debtor.⁴

• What about historical liabilities of a corporate debtor? What protections can prospective resolution applicants seek against them?

  Generally, all prospective resolution applicants receive the corporate debtor on a ‘clean slate’ basis as contemplated under Section 32A of the IBC. This principle has been affirmed by the Supreme Court in various judicial precedents. However, the interplay of Section 32A with certain criminal statutes (such as the Prevention of Money Laundering Act, 2002) is yet to be settled.⁵ Accordingly, prospective resolution applicants should ensure that their diligence is thorough and that sufficient protections are built into their resolution plans.

  It is important for a prospective resolution applicant to build in provisions in relation to the extinguishment of all liabilities of the corporate debtor (civil and criminal) and protection of the corporate debtor and the resolution applicants against all offences and liabilities, subsequent to approval of the resolution plan.

  The prospective resolution applicant may also seek necessary reliefs and concessions that the NCLT is entitled to grant – these could include exemptions from compliances under the Companies Act, 2013 pursuant to the acquisition of a corporate debtor by a resolution applicant.

  According to prevailing judicial precedent, for all matters arising out of applicable law and contracts, a resolution applicant will be required to satisfy the requirements of law and contracts. For instance, for termination of contracts, due process under the relevant contracts and applicable law is required to be followed. However, a resolution applicant should note that the position of law on simpliciter termination of contracts as part of an approved resolution plan is not fully settled.

• Can a resolution applicant withdraw a resolution plan?

  The CIRP is a sacrosanct and time-bound process. According to prevailing judicial precedent, withdrawal of a CoC-approved resolution plan is not permitted. If a resolution plan is sought to be withdrawn or is not implemented, this will attract penalties and forfeiture of any earnest money deposit and/or performance guarantee that may have been submitted by a resolution applicant along with the resolution plan. The NCLT may also impose additional penalty upon withdrawal or non-implementation of a resolution plan which is approved by the NCLT.

^[1] Insolvency and Bankruptcy Board of India’s Quarterly Newsletter for October - December 2022, available at https://ibbi.gov.in/uploads/publication/138597264c97f5fe167e1250e1e1e4bf.pdf
^[2] Ministry of Corporate Affairs, Invitation of comments from the public on changes being considered to the Insolvency and Bankruptcy Code 2016, 18 January 2023, available at https://www.mca.gov.in/content/dam/mca/pdf/IBC-2016-20230118.pdf
^[3] Tata Steel BSL Limited v Venus Recruiter Private Limited and Ors. (2023/DHC/000257)
^[4] CA M. Suresh Kumar, Resolution Professional of Hindustan Photo Films Mfg. Co. Ltd. IA(IBC)/99/(CHE)/2023 and IA(IBC)/204/(CHE)/2023 in TCP/1/2021
^[5] Delhi High Court in the matter of Rajiv Chakroborty, Resolution Professional of EEIL v Directorate of Enforcement W.P.(C) 9531/2020 and Nitin Jain, Liquidator of PSL Ltd. v Enforcement Directorate WP(C) 3261 of 2021 held that the Prevention of Money Laundering Act, 2002 is not subservient to the moratorium provisions under IBC and the Enforcement Directorate will be within its power to attach assets of a corporate debtor during the continuation of CIRP.

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